Disclosure Insight Report

August 03, 2015

Is Emerson Electric Too Close To Its Auditor?

The following is based on documents obtained
exclusively by Probes Reporter.

The SEC Investigation of KPMG

Disclosure Insight reports provide commentary and

analysis on public company interactions with investors
and with the SEC.

Emerson Electric (EMR)

Summary: Emerson Electric had two undisclosed
SEC investigations in the past few years. One was a
large, multi-year probe of Emersons relationship
with KPMG, its auditor of more than 50 years. That
ended Nov-2014. The second investigation was a
FCPA matter involving Saudi Arabia, which was of
relatively short duration. It ended Jan-2015 and
appears of little consequence to investors today.
Emerson made sweeping claims of confidentiality
to try to keep records related to the KPMG
investigation secret. We challenged these claims
and prevailed in securing release of enough
documents to leave us questioning whether
Emerson Electric is too close to its auditor.

Facts of Interest or Concern: We've been tracking

undisclosed SEC investigative activity at Emerson
since Oct-2013. We now know of two undisclosed
SEC probes directly involving this company.
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This is the first undisclosed SEC investigation we

learned about involving Emerson. It was titled,
KPMG LLP Certain Auditor Independence Issues [sic].
Rather than use its own personnel, or some other
entity, since at least 2009, Emerson was paying
KPMG to provide personnel on a seasonal basis as
borrowed staff to help with tax preparation. 2012
fees proposed by KPMG for Tax Compliance
Services totaled $1.65 million. Of this, $325,000
was for Tax Loaned Staff Services.
This investigation ran for three years; from Sep2011 through Nov-2014. It generated at least 23
boxes of records. Compared to other records and
information in our database, we categorize this as a
moderately large and protracted SEC probe.
From the Emerson proxy, filed Dec-2014
KPMG LLP served as the Companys independent
registered public accounting firm for fiscal 2014
and has been retained continuously as the
Companys external auditor for more than 50
years.
Emerson made sweeping claims of confidentiality
to protect records related to the KPMG
investigation. We previously criticized Emerson for

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August 03, 2015

its efforts to keep investors in the dark this way.
See, Something to Hide: Emerson Electric Claims
Nearly 16,000 Pages of Investigation-Related
Documents Are Secret
We challenged Emersons confidentiality claims on
a subset of the records at issue (We asked the SEC
to examine one of the 23 boxes of records).
The SEC found Emersons confidentiality claims
were unsubstantiated on more than 50% of the
records reviewed. Out of that one box of records,
1,540 pages were released to us. The SEC withheld
1,460 pages from that same box on grounds they
contained legitimate confidential information.
Our analysis is based largely on what was
contained in those 1,540 pages released to us as
well as SEC responses to our requests made on
Emerson since 2012.
Many of the records claimed as confidential by
Emerson were simply KPMG business brochures
and other mundane records already in circulation
(See below). This is typical when a company makes
sweeping, if not bogus, claims of confidentiality.
Documents released reference periods back to
about 2008 and include letters of engagement
between Emerson and KPMG regarding the
borrowed staff, status updates, and related email
exchanges.
We also received Public Company Accounting
Oversight Board reports on KPMG that cite an array
of shortfalls that agency had found involving the
auditors work across its client base (clients are not
named though).

The Saudi Arabia Investigation

The second investigation we found involved
Emersons hiring, compensation, and business
practices in Saudi Arabia. This investigation was
shorter, only running from Jul-2014 through Jan2015. We were not informed of any confidentiality
claims made on records related to this probe.
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The SEC refused to release the Case Closing

Recommendations on Emersons closed probes.
This is the one report the SEC produces which
describes why the probe was opened, what work
took place, and the conclusions reached. Case
Closing Reports and some of the documents that
were released appear at the end of this report.

Our Take: Unless it has broader FCPA implications,

we are comfortable with Emerson not having
disclosed the Saudi Arabia investigation. However,
we think it was wrong for Emerson to keep
investors in the dark and to further make sweeping
claims of confidentiality regarding the auditor
investigation.
The auditor probe was no small SEC investigation.
It generated a lot of records and took three years of
management time and company expense to
resolve. But Emerson made the active decision,
repeatedly, to keep it from investors.
So far as we know, and as is quite common, the SEC
ended the KPMG probe without recommending an
enforcement action.
But it still has negative
implications for the judgment and transparency of
Emerson management. It also has negative
implications for the audit committee, the board and
overall corporate governance.
In a marketplace with no shortage of alternatives,
this management team instead chose to borrow
staff from its auditor. Thats convenient, but lazy.
Arms-length? Apparently, the SEC wondered too.
The governance implications for the audit
committee and board are both serious and
substantial. They can only be properly vetted if the
probe is known to outsiders. Emerson worked hard
to make sure that didnt happen. Investors may
rightly wonder: What else is Emerson hiding?
KPMG / Emerson is a marriage of 50+ years.
Apparently, no one wants it to end anytime soon.
.

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This is from one of the letters in which the SEC informed us

Emerson Electric was claiming confidential treatment on
records related to what we later learned was the KPMG probe.

The Case Closing Reports along with records from the KPMG investigation
and the Saudi Arabia investigation appear below.

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Note the document was prepared in 2011

Note the document was prepared in 2012.

This is a page from a brochure KPMG routinely gives

to clients and prospects. Emerson Electric made the
bogus claim that records like this are "confidential" and
therefore should not be released.

The Saudi Arabia Investigation

August 03, 2015

To learn more on our process and what our findings mean, click here
Notes: The SEC did not disclose the details on investigations referenced above. The SEC reminds us that its assertion
of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any
violations of law have occurred with respect to any person, entity, or security. New SEC investigative activity could
theoretically begin or end after the date covered by this latest information which would not be reflected here.

Visit https://probesreporter.com/legal to read important disclosures applicable to our work or to learn more
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